Cut Capital Expenditures, Not People

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When executives want to boost profitability, their first target is often their "most valuable asset" (ha!) - people. But a better way to find value is to bring increased discipline to the capital budgeting process for small items.

Check out Tom Copeland's 2000 article in HBR - Cutting Costs Without Drawing Blood.

Here's what he says:

... a company can almost always create far more sustainable value by sensibly reducing its capital expenditures. How? Not by postponing or eliminating big spending projects, which are usually less than 20% of the budget anyway, but by conducting a rigorous, disciplined evaluation of the small-ticket items that usually get rubber-stamped. Those “little” requests often prove to be unnecessary—in some cases they duplicate other requests—or gold plated. But few managers have the time, energy, or inclination to ask about them. They should.

and:

You get more bang for the buck—or perhaps more buck for the bang—by cutting capex dollars than by cutting payroll. According to my estimates, the increased market valuation that resulted from Kodak’s $400 million payroll cuts could have been achieved by a $280 million reduction in capital spending. The reason for the difference, of course, is that a company has to make severance payments—$600 million in Kodak’s case—to people it has laid off. (There is no severance pay for capital.) The table compares recent payroll savings at Kodak and several other corporations with my estimated value-equivalent capex cuts.

Something to think about very, very carefully.

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This page contains a single entry by Christian Sarkar published on February 13, 2009 11:25 PM.

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